With the proliferation of recommendations by “financial experts”, commercials and media ads, coupled with conversations by well-intentioned family members and co-workers, credit has become a staple in our society. Americans are one of the most marketed to societies on the subject of credit and the benefits it’s supposed to afford us.

Because of the proclivity of belief in the importance of credit history and credit scores being acceptable and necessary to function in this country as a responsible adult, the majority of the population remains in debt their whole adult life. Credit history and credit scores are so valued that people will help another person get a loan so they can establish a credit history and credit score. They help the person establish credit by becoming a co-signer for their loan. Lending institutions request a co-signer when the person applying for the loan is unable to meet the borrowing guidelines of the institution.

Typically the person who can’t meet the borrowing guidelines either has a bad credit rating from previous poor credit management, too much debt related to their income (debt to income ratio), no credit history at all, or several other factors. In those situations, the lending institution deems the applicant too risky and requires a co-signer to have enough of a guarantee that the loan will be repaid.

That’s where the good intended you enters the picture. The applicant, who is your relative, friend, or worse an acquaintance, asks you to help them out and be a co-signer on their loan. They promise they’ll make the payments and tell you how badly they “need” whatever it is they’re wanting to purchase. They may also tell you that they need to do the loan to build their credit score so they’re able to get a loan later without a co-signer. Since you’re such a kind-spirited and helpful person, you agree to co-sign for them. After all, they “need” a credit history and a good credit score.

While you know that you’re responsible for the loan, you subconsciously rely on the notion that this person is good and you’re doing a good deed by helping them. You also believe that they’ll do what they said they would and repay the loan.

Fast forward a while later, and you get a phone call from the lender telling you that the loan maker has been late or missed some of the payments The lender also tells you it’s being reported on your credit report. You check with your co-signer and they tell you how they’ve had some problems, and they’re working on getting the loan caught up. You relax a little and hope they’re going to take care of it. Unfortunately, you get the same call next month from the lender. This time they tell you your co-signer is behind to the point that if nothing is done they’re either going to repossess the item or send the loan to a collection agency. They also tell you that those actions will negatively affect your credit report too.

Now you’re mad and worried that your good credit score/history is going to be seriously blemished. You contact your co-signer and read them the riot act. You tell them how they’re causing you a problem and hopefully, they’re apologetic and will tell you they’re going to correct the situation. This time though, you’re less accepting of their story.

Another possible outcome to you confronting them is that they tell you that they can’t or won’t pay the loan. Now you’re on the hook for the whole thing including the payments, which may not be in your budget or ability to pay. At this point, your relationship with that person has become damaged. Hopefully, the damage isn’t permanent, but you’ll never relate to them the same as before this occurred.

While the above scenario doesn’t happen regularly, it happens more often than desired. The potential problems that arise from co-signing can be vast and extremely harmful to you and your family’s financial future.

One other consideration about co-signing for someone’s loan is it affects your debt to income ratio leaving you less able to qualify for a loan. So, that new home, new car, new apartment or, other desires may not be able to occur because you’re on the hook for the other loan should that person fail to meet its requirements.

While I don’t support applying for new loans, sometimes doing so is a necessity to help you get out of debt quicker by moving a high-interest debt into a loan with a lower interest rate. Caution needs to be exercised in doing that because unless you’re committed to paying off your debt, transferring it to a lower interest loan will only exacerbate your debt situation. This is especially true if you don’t close the account for the high-interest debt that you used the lower interest loan to pay off.

Yet another consideration when co-signing is that you’re paving the way for that individual to dig themselves and you deeper in debt. This is especially troublesome when you co-sign for a young person just starting their adult life. Instead of co-signing for them, help them to find an alternative way to purchase whatever they’re wanting. When you do that, you’ll be doing them a bigger favor than simply co-signing for their loan. You’ll be doing yourself and your relationship, with that person, a bigger favor because you won’t be putting your neck on the block should they fail to repay the loan.

I hope today’s blog was encouraging to you and provided information to help you and others better handle their financial matters. My purpose through these blogs is to inform the reader about money and financial issues so that we all can become better managers of our assets. If you like what you read, make sure to sign up so you can receive my weekly posts. The goal of Take Two Financial Coaching is to provide the necessary information to help families and individuals break the chains of debt, build lasting wealth, and become outrageously generous.

For those who are tired of being in the rat race or just want to better manage what they earn, I am available to have a Free 60 Minute Conversation to discuss your situation and how I can help you change it. Go to my calendar at https://ramseycoach.com/taketwofinancialcoaching to arrange a time that works for you. You can also email me at taketwofinancialcoaching@gmail.